Capital Allocation Decision III

Why fully invested within 2 weeks? Why not keeping cash while waiting for bigger opportunity especially KLSE is in correction moods? True, if one has bigger sum to invest. However, in this case, I see good opportunity and not buying on impulse, put down a big bet was the right thing to do. Don’t procrastinate.

When one started with such a small amount, there are very limited options to maneuver. Transaction cost is a big problem for small investors. Minimum brokerage of $ 28 plus stamp duty and etc will workout around 2% for $1,500/transaction, a round trip of buying and selling will cost around 4%. This is almost same like putting money in mutual funds with loading fees between 5.5% to 6.5%. To achieve a better economies of scale, $3,000/transaction will keep trading fees more reasonable of around 1%.

Since I have $ 888/month coming, workout to be $ 10,656 a year. With that kind of money, I can only buy stocks 3 times/year. You see, very limited bullets, two more shots left only for 2008.

I need to be very sharp – must be a first class sharp shooter but at the same time I am only human. I must avoid making mistake on both new and reinvestment decisions at all costs in the first 3 -5 years. I must compound on successes and not failures.

Most people at this stage will be tempted to create high turnover hoping to build base as fast they can. I am totally disagree with this approach because the higher the turnover, the higher the probability you will make mistakes. You can win 9/10 times but 1/10 could destroy your capital base. Black Swan theory they call it. Let's take covered warrant for example, based on casual conversation with my broker, those entered in late December and January are in this situation, still licking wounds painfully and silently.

Next week, I will illustrate why the first 5 years is so important in building wealth.